ISRAEL: THE ECONOMIC IMPACT OF THE DEFENSE INDUSTRY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83S00854R000100160002-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 19
• Document Creation Date: December 21, 2016
• Document Release Date: September 2, 2008
• Sequence Number: 2
• Publication Date: September 1, 1982
• Content Type: REPORT

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Intelligence
Irs?a(cvA R~csca~rr-w ._ w- rcia~
Israel:
The Economic Impact
of the Defense Industry
State Dept. review completed
Secret
NESA 82-10500
September 1982
370
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Directorate of
Intelligence
of the Defense Industry
Israel:
The Economic Impact
This paper was prepared by
~bf the Office of Near East-South
Division, NESA
Asia Analysis. Comments and queries are welcome
and may be addressed to the Chief, Arab-Israeli
Intelligence Council
This assessment has been coordinated with the
Directorate of Operations and the National
Secret
NESA 82-10500
September 1982
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Secret
Israel:
The Economic Impact
of the Defense Industry
Key Judgments Israel's modern and rapidly growing arms industry will undertake a major
Information available weapons program over the next 10 years designed to reduce the country's
as of 15 July 1982 dependence on foreign suppliers and maintain its qualitative edge in
was used in this report.
weaponry over the Arabs. The major weapons include the development and
production of the Lavie jet fighter, improved versions of the Merkava tank,
and new combatants for the Navy. 25X1
To reduce the economic burden of this major undertaking Israel will:
? Look to the United States for additional financial assistance.
? Press the United States to facilitate third-country purchases of Israeli
military materiel.
Since the Israelis view the modernization program as vital to their national
security, they will proceed even if additional US aid is not forthcoming.
25X1
The growing demand for Israel's wide range of high-technology military
items and its aggressiveness in the export market should enable Israel to
double defense exports by 1985. Small arms, ammunition, communica- 25X1
tions, and electronic equipment have constituted the bulk of exports,
although sales of major military equipment, including the Kfir aircraft,
account for an increasing portion. A general relaxation of US restrictions
on Third World transfers of items incorporating US technology would
improve Israel's position in the foreign marketplace.
Building and maintaining Israel's military capability has absorbed a large
part of the government's resources, contributing to budget deficits that
play a major role in causing triple-digit inflation. Even with increased
exports and US assistance, Israel will continue to divert substantial funds
to the military from the civilian sector. As a result, the economy's ability to
sustain real growth in the future will be increasingly limited.
Secret
NESA 82-10500
September 1982
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Secret
major weapons systems for its armed forces (see
appendix). This effort will help Israel maintain its
qualitative edge in weaponry over the Arabs and
increase the technological base of its defense indus-
tries. Major weapons programs designed to help Israel
achieve this goal of self-sufficiency and promote
growth in its defense industries include the multi-
billion-dollar Lavie fighter aircraft project, continued
production of the Merkava tank for the armored 25X1
forces, and an ambitious shipbuilding effort for the
Israeli Navy. Israel will also continue to develop the
defense industry's capability to produce a host of 25X1
high-technology communications equipment, electron-
ics, and other sophisticated weapons for export.
We believe the Israelis want to reduce their depend-
ence on the United States for finished military equip-
ment. Most of the IDF's current inventory of equip-
ment-aircraft, tanks, artillery, and other
sophisticated weapons-has been supplied by the
United States. When US equipment is purchased, the
Israelis must agree that it will be used only for
defensive purposes. The Israelis maintain this limits
their freedom to conduct preemptive military actions,
a basic part of their military philosophy. US aircraft
deliveries were suspended for several weeks in 1981 in
the wake of the Israeli attack on the Iraqi nuclear 25X1
reactor in which US-supplied planes were used, and
deliveries of cluster munitions are currently suspended
because of the use of cluster bombs in Lebanon.F__1
25X1
Total military and economic aid provided by the
United States has amounted to $21 billion-almost
half in grants and the bulk of the remainder in
concessional or long-term loans. This aid has enabled
the Israelis to develop a fighting force qualitatively
much superior to those of the Arabs. At the same 25X1
time, Israel has developed a European standard of
living for its citizens; per capita GNP last year was
$5,250-on a par with Italy and Spain.
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Israel:
The Economic Impact
of the Defense Industry
The Israeli Government is undertaking an ambitious
arms development program that includes the domestic
production of a new fighter aircraft, an improved
main battle tank, and new combatants for the Navy.
Such a program is immensely costly and will severely
test the country's research and development capabili-
ties. The Israeli Government can be expected to push
for increased assistance from the United States and to
exploit the overseas market for sales of its defense
products to help pay for this program. We believe the
Israelis will proceed with their plans even if additional
US aid is not forthcoming because they believe it is
vital to their national security.
The Israeli Government's involvement in the defense
industries ensures that sufficient resources are allo-
cated to allow them to grow and that their products
respond to Ministry of Defense requirements and the
needs of the Israel Defense Forces (IDF). Israeli
defense industries wholly owned by the government
include Israel Aircraft Industries (IAI), Israel Mili-
tary Industries (IMI), Bet Shemesh Engines Limited,
and Israel Shipyards. They account for most of the
military equipment produced in Israel. Exports by IAI
and IMI alone amounted to three-fourths of total
foreign defense sales in 1981. There are also hundreds
of privately owned defense-related companies and
contractors that contribute to Israel's overall defense
production
Israel's arms industry is capable of producing a wide
range of weapons from the basic to the relatively
sophisticated. The economic feasibility of producing
sufficient quantities of major military items to sup-
plant a significant portion of imported military equip-
ment is constrained by limited research and develop-
ment capabilities, the level of military exports, and
the amount of financial and technical assistance that
the United States is willing to provide.
Key Production Goals
Israel's primary goal for its defense industry during
the next 10 years, according to Defense Minister
Sharon, will be the development and production of
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Table 1
Major Israeli Defense-Related Industries a
Koor Industries b Largest industrial enterprise. Building ma- 26,200
Electric & Electronics Co., Ltd. terials, chemicals, advanced metals, phar-
Eltek, Ltd. maceuticals, electronics, and diamonds
Keren Electronics, Ltd.
Koor-Babcock, Ltd.
Koor Systems, Ltd.
Meeda Scientific Instrument, Ltd.
Penguin Electronics Industries
Telkoor
Telrad Telecommunications and
Electronic Industries, Ltd.
Koor Metals, Ltd.
Agan Engineering Works
Gichner Ramin, Ltd.
Hamat Engineering
Merkavim Metal Work, Ltd.
Vulcan Engineering
Israel Aircraft Industries, Ltd. (IAI) Everything from design, development, and 22,500
Aircraft Manufacturing Division manufacturing of parts and components to
Bedek Aviation Division production of total systems-aircraft, mis-
Elta Electronics Industries, Ltd. siles, boats, and ground equipment
Engineering Division
Golan Metal & Electronics Industries,
Ltd.
MBT Weapon Systems
Orlite Engineering, Ltd.
Precision Mechanisms, Ltd.
Ramta Systems and Structures
Division
Servo Hydraulics, Ltd.
Taman Precision Instruments
Industries
Turbochrome, Ltd.
Comprises 60 major production
and 30 commercial companies.
Of this total, 40 are wholly
owned by Koor (which in turn is
owned by the nongovernmental
Israeli Labor Federation), and
50 are owned partly by Koor and
partly by other firms-foreign
and Israeli.
Ammunition Division
Central Laboratory
Chemical Division
Forging Division
Plant Operations
Rockets Division
Small Arms Division
Tadiran Israel Electronics, Ltd. Largest electronics developer and manu- 8,000
facturer; 50 percent of sales is communica-
tions equipment
Ground forces equipment, including artil- 1,800
lery; specializes in design and production of
mortars, associated ammunition, and
sights
50 percent US (GTE Sylvania)
50 percent Israel (Koor
Industries)
50 percent Finland (Tampella)
50 percent Israel (Koor
Industries)
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Bet-Shemesh Engines, Ltd.
Israel Electro-Optical Industry (ELOP)
Computers, displays, and training simula- 1,400
tors; 50 percent of sales is commercial
computer products, minicomputer systems,
and terminals; 50 percent of sales is mili-
tary systems, primarily to Israeli Govern-
ment
Communications equipment and command 1,200
and control systems
ECM, EW, and SIGINT equipment; 40 800
percent of sales is commercial communica-
tions switching equipment produced under
license from Siemans/West Germany; 60
percent of total output is for electronic
warfare systems
Jet engines and parts and castings 1,000
Gunsights, cameras, rangefinders, head-up 750
displays, and night-vision devices
55 percent US (Control Data
Corporation)
45 percent Israel (Elron)
37 percent US (American Elec-
tronic Laboratories), 37 percent
Swiss bank and Siemans of
West Germany, 26 percent Isra-
el (Tadiran-see above for
ownership)
Israeli Government
50 percent Dutch (NV Optische
Industries), 50 percent Israeli
Government
a An industrial conglomerate named CLAL, composed of 180
companies and 12,000 employees, is one of the largest Israeli
enterprises in the defense field. It is not included in this list because,
apparently, only a small percentage of its work is defense related;
information on the names of the associated companies is incomplete;
and ownership of the firms under the CLAL rubric has in most cases
been impossible to determine.
b Although Koor Industries is Israel's largest industrial enterprise, a
majority of its output is not defense related.
Israel's defense effort has not been without cost. The
most important has been the diversion of investment
to the military from the civilian sector. As a result,
the economy's ability to sustain growth in the future is
increasingly limited. Without new investment in plant
and equipment, the economy's productive capacity
will remain stagnant. Moreover, government outlays
for defense have increased the budget deficits-a
major factor in Israel's setting the world's highest
inflation levels in recent years
c IMI is made up of 12 major government-owned plants producing
hardware and more than 200 small nongovernmental establishments
Exports. Exports are necessary to reduce the econom-
ic burden of Israel's arms industry. It has become
increasingly dependent on foreign military sales to
offset constantly rising research and development
costs. Because of the relatively short production runs
on major items of military equipment, an aggressive
export program is needed to help offset the large
capital investments and high overhead involved in the
production process.
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The Israelis have also been marketing their military
equipment abroad to earn foreign exchange to pay for
imported materials and weapons. Roughly half of the
components used in domestic defense production are
purchased abroad, which added an estimated $720
million to the 1981 import bill. Export revenues help
cover the cost of weapons purchased from Western
Europe-usually about $250 million a year.
According to data provided by Israel to US officials,
foreign sales of Israeli-manufactured military equip-
ment have risen from $400 million in 1977 to an
estimated $1.2 billion in 1981. Small arms, ammuni-
tion, communications and electronic equipment, as
well as obsolete military equipment, constitute the
bulk of the exports. Sales of major military equip-
ment, however, account for an increasing portion of
the total sales volume.
Nearly one-third of Israel's total military export sales
in 1981 were manufactured by Israel Military Indus-
tries. IMI's reported export sales of $350 million
amounted to 70 percent of its total business last year.
A sales leader for IMI was its highly successful
M-111 tungsten antitank ammunition.
IMI has also found a growing market for its Uzi
submachineguns, and the Israelis report that they sold
60,000 of these weapons in the United States alone
last year. According to the Israelis, exports by Ta-
diran, a manufacturer of high-technology electronics
equipment and remotely piloted reconnaissance
drones, climbed from 6 percent of total sales in 1977
to over 40 percent of its $340 million total sales in
1981.
Latin America has become Israel's prime market for
military exports-followed by Europe, Asia, and Afri-
ca. Sales of Israeli-manufactured military equipment
have included the Arava transport aircraft-now in
the inventories of eight Latin American countries-
Dabur patrol boats, Gabriel antiship missiles, Shafrir
air-to-air missiles, and substantial quantities of auto-
matic weapons. Israel recently sold 12 Kfir fighter
aircraft to Ecuador after receiving US approval for
third-country export of the US engine used in the
plane. It was the first foreign sale of the Kfir, and
deliveries began in late March. This sale, reportedly
for $196 million, could open up additional sales to
other Latin American countries of the IAI-produced
The key limiting factor for exports of Israeli-manu-
factured military equipment, in addition to intense
competition, has been US Government restrictions on
third-country transfers of items manufactured under
US license or incorporating US technology. With US
permission to sell the Kfir to Ecuador, the Israeli
Government hopes that the door will be opened to US
consent to future Kfir sales. Israel also would like the
United States to allow the use of Foreign Military
Sales (FMS) credits by Third World countries for
purchasing Israeli-manufactured military equipment.
of their economic ties with Arab oil producers.
Another factor limiting Israel's exports is the reluc-
tance of some Third World countries to purchase
high-visibility military hardware from Israel because
The demand for Israel's military equipment is grow-
ing. Israel's increased capabilities in the production of
high-technology military items and the growing de-
mand for this equipment will serve to boost foreign
sales. The market for Israeli-produced equipment will
be enhanced because its effectiveness in combat was
demonstrated in Lebanon. The picture would brighten
for Israeli military exports even more if the United
States permits Third World transfers and assists the
Israelis in their exports to the US market.
Unlike past years, the government may be able to
increase future defense exports by at least enough to
cover increased military imports and higher debt
servicing on defense loans. If the Israelis succeed in
promoting sales of their military equipment to the
extent we believe likely, export revenues together with
current levels of US FMS funds would outstrip
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25X1
25X1
25X1
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Secret
Table 2
Israel: Foreign Sales of Military Equipment by Selected Firms
as a Share of Total Sales, 1981
Total
Israel Aircraft Industries (IAI) Kfir fighter aircraft
Arava transport aircraft
Gabriel antiship missile
Shafrir air-to-air missile
Picket antitank missile
Scout mini-RPV
Radar/electronic warfare equipment
Motorola Israel, Ltd.
Israel Electro-Optical
Industry (ELOP)
M-111 antitank round
B-300 antitank rocket
52-mm to 120-mm mortar ammunition
Galil and Uzi automatic weapons
Mastiff mini-RPV
Electronics equipment
Communications equipment 45 18 40
Laser rangefinders 31 NA NA
Gunsights
Avionics
Night-vision equipment
military-related foreign exchange outlays by several
hundred million dollars. This money could be used,
for example, to defray some of the development costs
for the Lavie program.
Investment. By investing large sums of money in the
arms industry on the part of both the government,
through its wholly owned companies, and the private
defense-related companies, resources available for ci-
vilian plant and equipment and housing have been less
than otherwise possible. Plant and equipment invest-
ment for industry fell at an annual rate of 2 percent
between 1975 and 1981. Investment for defense pur-
poses cannot be broken out separately, but investment
by civilian firms must have declined at a greater rate
since defense industries continued to expand. Invest-
ment in housing, which is in very short supply in
Israel, fell at an annual rate of 3 percent.
The heavy government involvement in the defense
industry ensures that sufficient funds are available to
finance the plant and equipment required to produce
weapons. The government directly funds some of this
investment, which, to the extent that it is covered by
government borrowing, diverts money that would 25X1
otherwise be available on the capital market. Defense
industries that compete for loans-monetary policy is
carried out by setting credit limits to Israeli banks-
have an advantage; we believe that bankers assume
the government will bail out any defense-related firm
in financial difficulty. Since officials of defense indus-
tries know that they can probably count on govern-
ment support, they can afford to take greater risks on
expansion. 25X1
Government Budget. Building and maintaining Isra-
el's military capability has absorbed a large part of
the government's resources. Roughly one-third of the
budget in recent years has been allocated to defense,
and the proportion has been even greater during and
immediately after periods of conflict-half of the
FY 1973 (April to March) budget was spent on
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Table 3
Israel: Foreign Exchange Requirements for Defense
Gross foreign exchange requirement
Self-financed military imports
Military import payments
US FMS aid c
Indirect defense imports
Defense exports
Net foreign exchange requirement
a Estimated.
b Projected.
cIncludes Sinai redeployment aid.
d Minus sign indicates a surplus.
987
1,153
1,202
1,415
1,792
1,404
1,639
2,261
2,316
210
293
250
250
497
-141
-76
396
306
1,325
1,690
1,420
2,018
2,404
2,055
1,958
2,133
2,014
1,115
1,397
1,170
1,768
1,907
2,196
2,034
1,737
1,708
357
390
482
525
575
645
715
765
820
340
400
515
605
685
750
165
170
180
185
175
130
110
80
70
420
470
470
640
720
900
1,000
1,100
1,190
400
555
640
730
1,200
1,600
2,100
2,300
2,500
587
598
562
685
592
-196 d
-461 d
- 39d
-184 d
defense, and its share remained nearly 40 percent over
the next three fiscal years. With the end of the
redeployment from Sinai and the defense cuts accept-
ed by Defense Minister Sharon, the share of the
budget for the military approved for FY 1982 would
have dropped to 27 percent. With the invasion of
Lebanon, however, this has fallen by the wayside;
Israeli officials have already acknowledged the need
for a supplemental budget.
Information concerning the financial arrangements
between the government and the defense industries,
particularly IAI and IMI, is closely held. While IAI
and IMI, as government enterprises, are required to
adopt policies on the basis of economic criteria, the
government can and does provide economic induce-
ments to carry out the development and production of
items that meet the IDF's military requirements.
Approximately one-third of the government's defense
budget is allocated for domestic purchases and con-
struction; a major portion of these funds probably is
spent on goods produced by the defense industries
Purchases from the defense industries contribute to
the government's deficits-$2.7 billion in FY 1981.
While most direct military imports are funded by US
aid, principal and interest payments on the loan
portion of the aid and borrowing to finance past 25X1
deficits-30 percent of budget outlays-add to the
present deficit. These budget deficits contribute to
Israel's triple-digit inflation.
Attempts by previous finance ministers to reduce
government expenditures have foundered because oth-
er defense ministers have been able to block cuts in
the traditionally sacrosanct defense budget, including
procurement from the defense industries. As a result,
officials in these firms had become reasonably confi-
dent that the government would follow through on
weapons procurement once the decision to produce
had been made. Sharon, however, has broken with the
past and pursued spending cuts; before the invasion of
Lebanon domestic defense spending was to have been
cut by 2.3 percent in real terms for FY 1982.
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Secret
Table 4
Israel: Defense Expenditures a
Defense (million US $)
4,211
3,948
Total government budget
(million US $)
10,350
11,545
Defense share (percent)
40.7
34.2
Although Sharon has given the go-ahead for the Lavie
after stopping work for several months, the delay has
probably led to concern on the part of top-level
defense industry officials that Sharon, who has not
been part of the close-knit defense establishment,
would suddenly halt a project after large sums of
money had been invested.
With defense and debt servicing slated to receive
more than half of the budget, the remaining funds are
allocated for such things as welfare, education, and
development projects. These social services have tradi-
tionally been target areas for budget trimming since
servicing the debt is a legal obligation and cutting
defense had proved impossible. With Sharon's help in
cutting the defense budget, Finance Minister Aridor
is getting grudging support from other ministers to
keep the lid on social spending
Employment. Although defense industries employ less
than 5 percent of the civilian labor force, a dispropor-
tionate share of this manpower is highly skilled. These
workers would have difficulty finding jobs in the
civilian economy because their training is highly
specialized and geared to military requirements. Con-
cern that aircraft engineers and technicians, now
involved in the nearly completed production of the
Kfir fighter, would emigrate is one of the factors
involved in the recent decision to proceed with the
Lavie aircraft project.
There is a consensus in Israel that has evolved from
the original Zionist work ethic that the government
11,238 14,070 15,491 18,776 18,269
29.3 30.8 31.2 31.0 27.4
should provide an economic climate that gives job
opportunities to everyone who wants to work. We
believe that an unemployment rate higher than
5 percent-it averaged 5.1 percent in 1981-is con-
sidered by most Israelis to be unacceptable. Israel has
a relative abundance of skilled workers who have been
hardest hit by unemployment. One of the major
arguments by officials of defense companies against
any cutback in procurement from domestic defense
industries is the unemployment or emigration that
could result. 25X1
Implications for the United States 25X1
Israel looks to the United States for the bulk of its aid
largely because there are no other countries willing to
provide large sums of money and because the United
States makes available almost the full range of its
military technology. There has been a public debate in
Israel, however, over the wisdom of relying too closely
on US aid, and a vocal minority has argued in the 25X1
Israeli press that more effort ought to be directed
toward achieving self-sufficiency. We believe most
Israelis recognize that they have little choice but to
look to the United States if Israel is to maintain its
qualitative superiority. 25X1
The Israeli Government will point to the costs of
enhancing its defense capabilities to justify additional
aid on better terms. The United States is currently
providing $1.4 billion in regular FMS credits and 25X1
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proposes to increase this to $1.7 billion in FY 1983;
additional FMS aid is being provided for the Sinai
redeployment. Israel is required to spend this money
on US military equipment or technology. In addition,
Israel receives $785 million in economic aid that could
be used for military purposes since the only require-
ment is that Israel import civilian goods from the
United States of equivalent value
A portion-$500 million annually-of the FMS cred-
its that Israel receives does not have to be repaid. The
remaining loans have a 30-year term with a 10-year
grace period on principal. Military loans carry the
same rate of interest as the US Treasury is paying on
the date of disbursement. Economic aid has been
entirely in grants during the past two years, but the
proposal sent to Congress for FY 1983 would restore
the previous terms of two-thirds grant and one-third
loan.
To help fund Israel's defense plans, Prime Minister
Begin's government has made a number of proposals
to the United States aimed at reducing debt servicing
and increasing defense exports. It wants the United
States to:
? Restore the share of FMS credits that does not need
to be repaid to 50 percent-the proportion prior to
FY 1981.
? Provide military loans at concessional interest rates
as an alternative to increasing the forgiven share.
? Assist in promoting Israeli military exports to the
Department of Defense and US defense contractors,
with a target of $200 million annually.
? Provide an additional $150 million annually in FMS
credits that could be spent on the defense industry
in Israel. (A precedent was set when Israel was
allowed to use $107 million in FMS funds for
development and production of the Merkava in
1977.)
? Allow third countries to use a portion of their FMS
funds to buy military equipment from Israel. F__] 25X1
The Israeli Government will push for increased aid
even though the additional foreign exchange may not
be needed in the near term if its effort to exploit the
overseas arms market is successful. It does not want to
rely on an unpredictable export market, preferring to
have an assured flow of US funds. Moreover, it sees
US aid as a measure of US willingness to support
Israel and as a way of substantially reducing the 25X1
burden imposed by the defense industries on the
civilian economy.
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Appendix
25X1
Major Israeli Weapons
25X1
Programs
The Lavie Aircraft
Defense Minister Sharon decided in February to
proceed with the development of the Lavie (Lion)
fighter aircraft. Israel Aircraft Industries (IAI) has
been working on the design and development of the
Lavie since at least mid-1979, having persuaded the
Ministry of Defense that it could produce a new
generation fighter equal to one available from the
West. The Lavie will be lighter and more maneuver-
able than the F-16, and, although designed primarily
for a low-level ground attack mission, it will also have
an air-to-air combat capability.
IAI plans an initial production run of 300 Lavies for
the Israeli Air Force with delivery scheduled to begin
in 1991. The Air Force plans to replace its aging A-4s
and some of its Kfirs with the Lavies, and the first
Lavie squadron could be operational by 1992. We
estimate that the Air Force's inventory in the late
1990s could include the 300 Lavies, 150 F-16s, 50
F-15s, and 100 upgraded F-4s.
The Israelis are considering the production of 400
additional Lavies for export. Competition from West-
ern aircraft likely to be available on the market in the
next 10 years could hurt foreign sales of the Lavie,
essentially a product of 1970s technology. While there
is a growing market for Israeli aircraft in the Third
World, as recent sales of the Kfir fighter have shown,
Israel's plan to sell 400 Lavies abroad would annear to
be no more than wishful thinking.
In November 1981 Sharon ordered IAI to suspend all
planning and contractual negotiations on the Lavie in
order to allow the government to reassess the pro-
gram. The Israelis considered alternatives to the
Lavie program, including coproduction of the US
F-16 or F-18 and the purchase of an additional 250
F-16s. They concluded that the Lavie could be pro-
duced at less cost-an estimated $10.5 million per
plane-than the F-16, which costs about $15 million.
Even if the costs were the same, the Israelis would
still have given the green light to the Lavie because it
would boost their domestic defense industry. The
Lavie program would sustain employment of thou-
sands of workers in the aircraft industry, and the
talents of hundreds of highly skilled engineers and
technicians could be retained. A domestically pro-
duced aircraft would also give Israel greater indepen-
dence in its use; if a market can be found, export sales
would help defray some of the costs.
The primary obstacle to Israel's production of the
Lavie is the immense cost of design and development
of the aircraft. These costs have risen from an esti-
mated $600 million in mid-1980 to the current esti-
mate of $1.1 billion. Lacking sufficient funds for
development of the Lavie in the defense budget, Israel
is seeking increased technical and financial assistance
from the United States. This assistance could come
from coproduction, offset agreements with US air- 25X1
craft manufacturers, or the use of Foreign Military
Sales (FMS) funds. Israel has already requested the
conversion of $100 million in FMS credits to purchase
products for the Lavie program. Israel has also sug-
gested, as one of its arguments for US.aid, that the
US Air Force adopt the Lavie as a multipurpose 25X1
Israel must now decide whether IAI will produce most
of the airframe, engine, and avionics for the Lavie or
enter into a massive coproduction program with a US
aircraft manufacturer
(Israel
signed a licensing agreement in early February with
the US firm Pratt and Whitney to manufacture the
PW1120 engine for the Lavie at Israel's recently
expanded Bet Shemesh engine plant. Discussions with
US manufacturers are still under way, and proposals
are being formulated for the coproduction of Lavie
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25X1
25X1
 Approved For Release 2008/09/02 : CIA-RDP83SO0854R000100160002-7
Estimated Lavie Aircraft Development and Production Timetable
Key Milestones
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
Prototype Development
D
i
P
li
i
gn
nary
es
?
re
m
? Prototype Design and
Manufacturing
T
t
Fli
h
es
s
? Prototype
g
t
Series Production
? Pre-Series Production
? Flight Tests
? Low-Rate Series Production
? High-Rate Production and
Delivery of Series Aircraft
components or provision of offsets by US firms in
exchange for Israel's agreement to purchase addition-
al US fighter aircraft. The primary candidates for
partnership in the Lavie program are General Dy-
namics, manufacturer of the F- 16, and McDonnell
Douglas, builder of F-15s and F-18s. Northrup, which
manufactures the F-18L and F-5G, apparently has
been edged out of the race because the F-5G would be
a major competitor of the Lavie in the export market.
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 Approved For Release 2008/09/02 : CIA-RDP83SO0854R000100160002-7
Secret
Merkava Tank
The Merkava (Chariot) is the first main battle tank
developed and produced by Israel for the Israel
Defense Forces (IDF). Production of the tank, over 50
percent of which is manufactured in Israel at govern-
ment-owned facilities, will probably continue through
the 1980s. A follow-on model, the MARK-II, is
scheduled for production by late 1983, and develop-
ment of an updated MARK-III is already under way.
Production of the MARK-III is expected to begin by
the late 1980s.
Future purchases of US M-60s by Israel could be cut
back considerably as Merkava production increases,
and production of the MARK-III, possibly beginning
as early as 1986, could obviate major purchases of the
US M-1. Based on the current estimated Merkava-I
production rate of 80 per year and a rate of 125 tanks
per year for the MARK-II and MARK-III, Israel
could have over 1,000 Merkavas in its inventory by
1990.
Since the first tanks rolled off the assembly line in
December 1979, more than 200 Merkavas have been
deployed with Israeli armored units. The IDF is very
enthusiastic about the tank's performance and expects
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 Main armament
(millimeter)
Israel Israel
M-60 M-1 T-72 Leopard-II Improved
Chieftain
900
1,200/1,500 750
(turbine)
1,500
(turbine)
750
1,500
1,200
105
120 105
105
125
120
120
to make it the mainstay of the armored forces. With
the flexibility of being able to modify and make
improvements to the tank while it is in production,
Israel can build a tank ideally tailored to the IDF's
needs.
The Merkava-I is the equivalent of the US M-60 in
size and firepower, but, with a larger engine, im-
proved armor, and other innovations, it outperforms
the M-60 and has greater survivability. Each Mer-
kava reportedly costs over $1.6 million to produce,
approximately half of which is in US equipment or
materials, including the tank's Continental 900-horse-
power (hp) diesel engine, transmission, and armor
plate. If the more than $200 million in development
and tooling costs reportedly spent by Israel during the
last 10 years on the tank is excluded, the cost of each
Merkava comes to a little over $1.2 million. Using this
figure, the Merkava is less expensive than the US
M-60, which has a price tag of $1.4 million. Forty
Israeli defense contractors and 200 smaller suppliers,
employing over 5,000 people, are involved in the
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manufacture of the Merkava. The Merkava's 105-mm
main gun is manufactured by IMI, its laser range-
finder is made by ELOP, and the turret is cast by
To keep pace with the new generation of main battle
tanks, major changes and improvements are planned
for subsequent models of the Merkava. MARK-II will
have the same 900-hp engine as the Merkava-I but
will have an improved transmission and special armor
claimed to be 100 percent more effective than the
armor on the current Merkava. The MARK-III, still
on the drawing boards, will have a 1,200-hp engine,
improved suspension, and a 120-mm main gun, mak-
ing it equivalent to the US M-1, West German
Leopard-11, and British Chieftain tank. Israel is also
considering the possibility of producing, with a US
firm, a gas turbine engine for the MARK-III similar
to the 1,500-hp turbine in the M-1.
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 Approved For Release 2008/09/02 : CIA-RDP83SO0854R000100160002-7
Secret
Naval Shipbuilding shipyard is currently involved in a program to mod-
The Israeli Government is expected to provide $25 ernize several of the Navy's Reshef-class missile
million over the next few years to improve and expand patrol boats. It is expected to be completed by 1983.
the capacity of Israel Shipyards in Haifa. Israel's 25X1
plans to modernize its Navy and increase the size of
its guided missile patrol boat fleet during the 1980s The Israeli-designed guided missile corvette-desig-
will be a major shot in the arm for its domestic nated the Saar-V-would be the largest ship in the
shipbuilding industry. Israel Shipyards hopes to pro- Israeli Navy. The Navy hopes to have six to seven of
duce a new 850- to 900-ton guided missile corvette these ships by the late 1980s. The Saar-V is estimated
currently under development for the Navy, as well as to cost $115 million for the first unit and $73 million
a hydrofoil missile attack boat of US design. The
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 Approved For Release 2008/09/02 : CIA-RDP83SO0854R000100160002-7
Table A-2
Current and Projected Inventory of Guided Missile
Patrol Combatants in Israeli Navy
Total 19 26
Flagstaff-II hydrofoil PGG 0 12
Saar-V missile corvette PGGH 0 2
Aliyah-class extended Reshef PGGH
Romat-class extended Reshef PGG
Saar-IV Reshef-class PGG
Saar-III PTFG
Saar-II PTFG
for the follow-on units. Funding for the Saar-V is not
available in the current Israeli military budget, and
Israel is reportedly looking to the United States for
help in financing the project.
The first of two Grumman Flagstaff-II hydrofoil
missile boats contracted for in 1977 is scheduled to be
delivered to Israel later this year. The second vessel is
being built by Israel Shipyards and is to be completed
next year. The Navy will decide whether to enter
production on the Flagstaff-II under a licensing
agreement with Grumman following its operational
evaluation of the craft in 1983. Design changes and
technical problems have raised the cost estimated for
the first production hull from $30-40 million to over
$60 million.
Defense Minister Sharon's reductions in the defense
budget could threaten the Navy's modernization pro-
grams. US financial assistance would become even
more critical if Israel plans to develop a "blue-water"
navy that can operate widely in the Mediterranean
and Red Seas)
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 Secret
Secret
Approved For Release 2008/09/02 : CIA-RDP83SO0854R000100160002-7
Approved For Release 2008/09/02 : CIA-RDP83SO0854R000100160002-7